A right-of-use asset (ROU asset) is an asset that represents a lessee's right to use an underlying asset for the lease term. It is recognized by a lessee under Hong Kong Financial Reporting Standards (HKFRS) 16 Leases, which was effective for annual periods beginning on or after 1 January 2019.
The ROU asset is measured at the present value of the lease payments, discounted using the lessee's incremental borrowing rate. The lease payments include the minimum lease payments, any lease payments that are not fixed, and any amounts expected to be paid under a residual value guarantee.
The ROU asset is then depreciated over the lease term, using the same method and useful life that the lessee would use if it had purchased the underlying asset.
The following are some of the key requirements for ROU assets under HKFRS 16:
A lessee must recognize an ROU asset and a lease liability for all leases, with a few exceptions such as short-term leases and leases of low-value assets.
The ROU asset is measured at the present value of the lease payments, discounted using the lessee's incremental borrowing rate.
The ROU asset is depreciated over the lease term, using the same method and useful life that the lessee would use if it had purchased the underlying asset.
The lease liability is measured at the present value of the lease payments, discounted using the interest rate implicit in the lease, if it is readily determinable. Otherwise, the lessee's incremental borrowing rate is used.
The lease liability is reduced by the amount of lease payments made during the period.
Any lease incentives received by the lessee are deducted from the ROU asset.
The recognition of ROU assets under HKFRS 16 has a number of implications for lessee's financial statements. The ROU asset will increase the lessee's assets and liabilities, and will also affect the lessee's profit or loss through depreciation and interest expense. This can have a significant impact on the lessee's financial ratios and financial position.
If you have any further questions about ROU assets under HKFRS 16, please contact us.
How Bestar can Help
Bestar is a Hong Kong-based accounting firm that specializes in providing accounting, tax, and advisory services to businesses of all sizes. We have a team of experienced accountants who are familiar with the HKFRS 16 Leases requirements and can help you to:
Determine whether your leases are within the scope of HKFRS 16.
Measure and account for your ROU assets and lease liabilities.
Prepare the necessary disclosures for your financial statements.
Advise you on the tax implications of your leases.
If you are a lessee in Hong Kong, Bestar can help you to navigate the complex requirements of HKFRS 16 and ensure that your leases are accounted for correctly.
Here are some specific services that Bestar offers in relation to right-of-use assets:
Lease accounting services: Bestar can help you to determine whether your leases are within the scope of HKFRS 16, measure and account for your ROU assets and lease liabilities, and prepare the necessary disclosures for your financial statements.
Lease advisory services: Bestar can advise you on the tax implications of your leases, manage your lease portfolio effectively, and negotiate favorable lease terms with your lessors.
Lease termination services: Bestar can help you to exit leases that are no longer in your best interests.
If you are interested in learning more about how Bestar can help you with your right-of-use assets, please contact us to schedule a consultation.